Accounting Made Easy

Preface
By Ved Bangia

“Live as if you were to die tomorrow. Learn as if you were to live forever.
- Mahatma Gandhi

I am, with my colleagues, specially Tanvi Nalawade, delighted to place this

book ‘Accounting Made Easy’ on Financial Accounting in the hands of our
readers. This book is mainly intended to meet the requirements of curious
and beginners in accounting as students in schools, colleges and universities
anywhere in the world. At the same time, every effort has also been made
to fulfill the needs of those students with non accounting background who
are learning making or operating digital accounting softwares and
applications, and management students as well.

This book keeps things straight and simple with practical and simple
examples that help elucidate the concepts without the unnecessary jargon
of the technicalities. it is structured around financial accounting principles
comprising the following chapters: Accounting Process or different
accounting cycles starting from accounting equation to the preparation of
Final Accounts.

This book becomes more useful when it is read after watching the available
free videos on YouTube under channel ‘Smart Lectures’ or our
website www.smartlectures.in. All the content of this book has been
designed as per the recapitulation text of each episode. It is equally
useful even it is studied independently without watching our videos.

We have been propelled to write this book by a large number of our

students who often complained that though there were many large and
bulky books in the market but none of them presented the basic accounting
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concepts and practices in a simple reader-friendly manner that would

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provide basic knowledge without unnecessarily adding reams of paper. We

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 Accounting Made Easy

intend to provide the readers with an in-depth understanding of the

fundamentals of accounting carefully woven with the yarn of corporate
experiences. The main objective of this book is to help you
learn and understand the tenets encompassing preparation, use and
analysis of financial statements supplemented with real life examples and
scenarios in a concise, simple and comprehensive manner.

For the convenience of learning the subject Accounting, we have divided the
process of Accounting in three cycles

1. Accounting equation
2. Journal entries
3. Subsidiary books

Through the explanations of these accounting cycles, we will be able to

explain all the basics of Accounting. These tips or notes will become more
effective if these notes are coupled with watching our free YouTube channel
‘Smart Lectures’

We can assure you that after reading this book ‘Accounting Made Easy’, you
will be ready to understand the further advanced accounting with amazing
ease any course at any level.

Happy learning!

Ved Bangia
Director
Smart Lectures
[email protected]
www.smartlectures.in
Meet us at YouTube channel
Smart Lectures
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INDEX
Sr. No. Contents Page No.
1. Accounting Equation
 Different basic definitions. 5-53
 Explanation of accounting cycle involving Accounting
Equation.
 How to convert business transactions into Accounting
Equation.
 How to make Balance Sheet on the basis of last
Accounting Equation.
 How to calculate profit of the firm on the basis of last
Accounting Equation by applying formula.

2. Journal Entries
 Different basic definitions. 54-121
 Explanation of accounting cycle involving Journal
Entries.
 How to convert business transactions into Journal
Entries.

3. Ledger Posting and Trial Balance

 How to do ledger posting on the basis of Journal 122-148
Entries.
 How to make Trial Balance on the basis of ledgers.
 Features of Trial Balance.

4. Subsidiary Books
 Different basic definitions. 149-192
 Explanation of accounting cycle involving Subsidiary
Books.
 How to record business transactions into different
Subsidiary Books.
 How to do ledger posting on the basis of Subsidiary
Books.

5. Final Accounts
 Different basic definitions. 193-224
 Features of Final Accounts.
 How to prepare Final Accounts / Financial Statements
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on the basis of Trial Balance.

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Topic:
Accounting Equations
Though now a days, accounting is done on available computer
applications and software. Here we are trying to teach you the manual
accounting. It is a proven track that no body can become skilled
accountant unless he knows the very basics of this subject. Manual
accounting is the best way to learn basics. Though this chapter of the
course has been prepared for beginners of accounting at school or
university level but this learning will be equally useful for those people
who aspire to become skilled accounting professional and aspiring IT
professionals who are planning to develop some accounting related
computer application or software in future. It can also help a lot to give
the overall view of accounting for entrepreneurs.

There are three accounting cycles for maintaining books of any firm or
company.

1. Accounting Equations
2. Journal entries
3. Subsidiary books.

Under this chapter, the accounting cycle of Accounting Equations has

been explained which can help you to do the full accounting of
transactions of any firm. Though it is neither acceptable in the industry
nor the IT ambit. But this accounting cycle will help you a lot to
understand the insights of accounting. We can not ignore this fact that
this accounting cycle is explained in schools and universities to make
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the foundation of this subject.

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Accounting Equations / Episode No.01

❖Notes:

 Business means commercial activity or any

other activity to make a profit.

 Business Dealings means Transactions.

 Transaction means any dealing/incident

which has money value and related to the
business.

 Accounting means systematic noting of

business dealings or transaction.

 Whenever accounting is done, we have to

follow some specific rules.
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 The specific rules of accounting are called

concepts, conventions and principles of
Accounting.

 Accounting Equations means equation related

to Accounting.

Accounting Equations / Episode No.02

❖Notes:

 Following is the accounting equation:

Capital + Liabilities = Assets

 Capital is the contribution of cash or any

other assets to the business, from own
resources which is non-refundable to anyone
in future.
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 Example 01: A saves his money and then starts

some business with that saved cash of Rs.5,000/-.
This cash of Rs.5,000/- will be called capital
because it contains the following features:

1. This is the contribution of cash to the business.

2. This is the contribution from own
resources which is non-refundable to anyone
in future.

 Example 02:A gets Rs.5,000/- from his father as

gift and then starts some business with that cash
of Rs.5,000. This cash of Rs.5,000/- will be called
capital because it contains the following features:

1. This is the contribution of cash to the business.

2. This is the contribution from own
resources which is non-refundable to anyone
in future.
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Practical Question:
1. A starts business with cash Rs.5,000/-.
Transacti Capital + Liability Assets
ons
Capital Creditors Cash Stock /
Goods
1 + 5,000 - +5,000 -
5,000 - 5,000 -

 Example 03 : A gets Rs.5,000/- from his father as

loan which will be paid after three years, and then
starts some business with that cash of Rs.5,000/-.
This cash of Rs.5,000/- will NOT be called capital
because this is the contribution of cash to the
business but this contribution is not from own
resources and it is refundable. It was a loan from
father to be paid back in future.

 Liability means money to be paid back in future.

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 Long term in Accounting means more than one

year.

 Loan means money to be paid in future.Loan is a

liability.

 Long term loan means the loan to be paid after

one year.

 Investment of owner in the business = Capital +

Long term loans

 Capital is also called own funds.

 Capital is also called equity.

 Capital and Investment of the owner in the

business have got different meanings in
Accounting.
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 Short term in Accounting means up-to one year.

 Short term loan means the loan to be paid back

within one year.

 Short term loans are not part of Investment of

owner in the business.

 The cycle of activities means a set of repetitive

activities.

 Accounting activity means noting of business

transactions in a particular way.

 Accounting cycle means repetitive accounting

activities in the business.

 Capital means money contributed from your own

resources for the business.
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 Liability means any owing by the firm.

 Every transaction affects capital equation.

 In business there are two different entities:

 Owner
 Firm

 A firm is an artificial person, whereas the owner is

a real person.

 The owner makes all transactions on behalf of the

firm. But legally all business transactions are done
by the firm.

 As per Separate Entity Concept,

both firm and owner are separate entities.
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 Learning accountancy is like learning a new

language. Just like in learning a new language we
need to learn its grammar, rules etc. Similarly in
learning accountancy, we need to learn
its concepts, conventions, principles etc.

 Liability means any owing by the firm or

any loan taken from a friend, bank or outside
source.

 Liability doesn’t mean only the loan, but includes

any form of owing by the firm.

 Example: On 01/01/2020, rent of Rs.1,000 was

due to be paid but could not be paid. It will
become liability till it is paid. The name of this
liability will be ‘outstanding rent’.
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Accounting Equations / Episode No.03

❖Notes:

 Anything, having money value, owned by the firm

is called ‘Asset’ of the firm.

 Building, car, bike etc. are examples of Assets.

 Borrowed items are not assets.

Example: If you have borrowed a bike from your
friend for a month and it is at your home, you
can not say that you are the owner of that bike.
It is in your possession, not ownership.

 All items in your possession are not your assets.

 Generally, ownership of any item can be obtained

by paying money/price.
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 Example: If you go to market and pick up a bike by

paying the price to the shopkeeper, that bike will
become your asset. That will be under your legal
ownership.

 Legal ownership cannot be obtained by stealing.

 As per ‘Separate Entity Concept,’ the firm owns

the assets, not the proprietor.

 Example: A starts business with cash of Rs.5,000,

it means this money has been given by A to firm.
In this transaction, the name of the firm isn’t
given, let us assume the name of firm is ‘A
Traders’. It means A has given Rs.5,000 to firm.
Previously A was the owner of this cash but now
‘A Traders’ is the owner of this cash. This rule of
accounting is called ‘Separate Entity Concept’
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 Firm and Owner are different persons and

accounting is done for firm not owner.

 Any money to be received in future is called Asset.

 Example: A takes loan of Rs.10,000 from B for one

year on 01/01/2020, that amount will become
liability for A but it will be treated as an asset for
B till it is paid back.

 Types of assets:
 Anything owned having monetary value.

 Any money to be received in future.

 Any money paid in advance but the benefit

will be received in future

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 Example: Salary to employee was due to be paid

at Rs.1,000/- but he was paid Rs.1,200/. This 200
advance will be called ‘prepaid salary’ till it is
adjusted. All prepaid expenses are assets of the
firm.

Practical Question:
 Paid Salary Rs.1,000/-.
Transactions Capital + Liability Assets

Capital Creditors Cash Stock /

Goods
1 + 5,000 - +5,000 -
5,000 - 5,000 -
2. -1,000 - -1,000 -
4,000 - 4,000 -

 All expenses and losses reduce capital.

 Salary paid reduces the capital and cash.

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Accounting Equations / Episode No.04

❖Notes:

 Goods mean any item purchased for the

purpose of selling at the profit.

Example: Goods purchased for Rs.1,000/-.

Transactions Capital + Liability Assets

Capital Creditors Cash Stock / Goods

1 5,000 - 5,000 -

2 - 1,000 + 1,000
5,000 - 4,000 1,000

 A goods purchased is not an expense.

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 Goods purchased on cash increases stock and

reduces cash in Accounting Equation.

 Example: Books at book shop are goods not

the counter because books have been
purchased for selling at profit NOT the
counter.

Accounting Equations / Episode No.05

❖Notes:

 Money withdrawn from the business

for personal use is called drawings.

 Capital Increases if:

 There is fresh capital.

 If there is any profit in transaction.

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Practical Question:

Sold goods to C, costing Rs.500 /- for Rs.2,000/-.

Transa Capital + Liability Assets

ctions
Capital Creditors Cash Stock / Debtors
Goods
1 + 5,000 - +5,000 - -
5,000 - 5,000 - -
2 - -1,000 +1,000 -
5,000 - 4,000 1,000
3 +1,500 - - -500 +2,000
6,500 - 4,000 500 2,000

 Capital decreases if:

 There is a loss in any transaction.

 There is drawings
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Practical Question:

1. Cash taken for private use Rs.300/-.

Transactions Capital + Liability Assets

Capital Creditors Cash

1 5,000 - 5,000
5,000 - 5,000
2. -300 - -300
4,700 - 4,700

Accounting Equations / Episode No.06

❖Notes:

 Accounting is based on so many concepts,

rules, conventions and principles. Every
student of accountancy must be familiar with
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all of them.
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 Books must be closed after every 12 months,

this rule/concept is called ‘Accounting Period
Concept’.

 Every government fixes the date of closing of

books for the firms in that country. Most
popular date is 31st March every year. In
India it is 31st March.

 Balance Sheet is also called as ‘Position

Statement.’ It tells about assets & liabilities of
firm.

 Generally, the last equation is presented in a

different format and that presentation is
called ‘Balance Sheet’ in ‘T’ shape.

 Balance Sheet is the presentation of assets

and liabilities of the firm at a particular time.
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 Generally ‘Balance Sheet’ is presented in ‘T’

shape. But there are also some other formats
of Balance Sheet.

 Balance Sheets tells us what the firm ‘Owes

and Owns’ at a particular time.

 Capital is the liability of the firm towards the

owner.
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 Capital is an internal liability of the firm.

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Accounting Equations / Episode No.07

❖Notes:

 Closing of books means calculation of

profit of the firm and making of Balance
Sheet.

 In accountancy, all goods

are sold and purchased by the firm, not the
owner.

 Goods and Stock are one and the same thing.

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 Stock means any item which is available at

the firm for usual sale.
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Accounting Equations / Episode No.08

❖Notes:

 Purchases mean 'Purchase of Goods' for the

purpose of usual resale or further production
at profit in the business.
Example: Purchased goods Rs.1,000/-.

 Sales mean 'Sale of Goods'.

Example: A Sold goods to C, costing Rs.500 /- for
Rs.2,000/-.

 Sales, Turnover and Revenue are generally

one and same thing for most of the
businesses. More technical difference will be
explained at later stage.
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 Wages is a reward for the work to

the unskilled worker who does physical work
without any specialized skill.
Example: Paid Wages Rs.300/-

 Generally, wages are paid on an hourly basis

and temporary job.

 Salary is a payment to the worker for

performing a job, involving intelligent
/mental/skilful work. Generally, it is paid on a
weekly or monthly basis and a permanent job.
Example: Paid Salary Rs.1,000/-.

 Regular expenses like wages, salary,

advertisement, taxes, rent, maintenance of
machinery etc. are called routine expenses.
Example: Rent paid Rs.1,200/-.

 Expenses always reduce the Capital in the

Accounting Equation, it is a kind of loss.
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 Expenses are routine and expected

spending in business.

 Loss is always unexpected.

 In writing figures in India and Pakistan,

always use Comma to separate the digits of
Thousands and Lacs.
Example: Rs.1,23,456/-.
(One lac twenty three thousand four hundred fifty
six)

 In India and Pakistan, it is called 10 lacs but in

the western world, it is called one million.
Example:
10,00,000 (ten lacs)
1,000,000 (one million)
[Both above are same value]
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 The countries in the western world use coma

after three digits, right to left, to make it
thousand, million, billion and trillion.

Example:
1,000 One thousand
1,000,000 One million
1,000,000,000 One billion
1,000,000,000,000 One trilion

Accounting Equations / Episode No.09

❖Notes:

 The remaining stock of business at the end of

the accounting period is called Closing Stock.

 Closing stock is generally valued at lower of

cost price and selling price.
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 Example:
A runs a book shop. He buys 1000 books@10
each and sells 600 books@20 each. On 31st
March, he finds that he has 400 books left
unsold.
Closing Stock :400 books
Cost price :4,000/-
Selling price :8,000/-.
In Balance Sheet closing stock will be shown at
4,000/-.

 The process of counting the quantity and

value of goods is called Stock–taking.

 Any event in the business having no exact

money value, cannot be called as Transaction.

 Transaction types:
 Cash transaction → When cash comes in
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or goes out.
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 Non-Cash transaction → No cash comes

in or goes out.

 Sales types:
 Cash Sales → When Cash comes in or

goes out.
 Non Cash / Credit Sales → No Cash

comes in or goes out.

 Purchases types:
 Cash Purchases … when cash goes out

immediately.
 Credit Purchases → No Cash comes in or

goes out.

 Customer or buyer is a person, company, or

other entity which buys goods and
services produced by another person,
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company, or other entity.

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 Customers types:
 Cash Customers → Pays Cash

immediately
 Credit Customers → Doesn’t pay cash

immediately

 Credit customer is called a debtor.

 A supplier is a person or a company

which supplies goods or services to another
person/ company.

 Supplier types:
 Cash Supplier → Cash is paid

immediately
 Credit Supplier → Money to be paid

later
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 Credit supplier is called a creditor.

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 Creditors are liabilities to the company.

Practical Question:

1. Goods worth Rs.1,000 were purchased on cash.

2. Purchased goods from S, Rs.1,000/-.
3. A Sold goods to C, costing Rs.500 /- for Rs.2,000/-.
4. Sold goods costing Rs.1,000 for Rs.3,000.
Transa Capital + Liability Assets
ctions
Capital Creditors Cash Stock / Debtors
Goods
+ 5,000 - +5,000 - -
5,000 - 5,000 - -
1 - -1,000 +1,000 -
5,000 - 4,000 1,000
2 - +1,000 - +1,000
5,000 1,000 4,000 2,000
3 +1,500 - - -500 +2,000
6,500 1,000 4,000 1500 2,000
4 +2,000 - +3,000 -1,000 -
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8,500 1,000 7,000 500 2,000

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Accounting Equations / Episode No.10

❖Notes:

 If any transaction is silent whether it is cash

or credit, it will be treated as a
credit transaction if the name of the party is
given.

 If any transaction is silent whether it is cash

or credit, it will be treated as cash
transaction if the name of the party is not
given.

 Example: A Sold goods to B, costing Rs.500 /- for

Rs.2,000/-.
(It will be assumed as credit transaction)

 Example: Sold goods costing Rs.1,000 for

Rs.3,000/.
(It will be assumed as cash transaction)
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 Capital will be reduced if there is any expense

or loss.

 A creditor is a short term Liability.

Accounting Equations / Episode No.11

❖Notes:

 The money spent for carrying goods is

called carriage.

 Carriage paid for carrying goods from supplier

to our workplace is called Carriage Inward.

 Carriage paid for carrying goods from our

shop/factory to the customer is
called Carriage Outward.
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Practical Question:

1. Paid carriage inwards Rs.1,000/-.

Transactions Capital + Liability Assets

Capital Creditors Cash

1 + 5,000 - +5,000

5,000 - 5,000

2. -1,000 -1,000

4,000 4,000
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Accounting Equations / Episode No.12

❖Notes:

 Money or any asset taken from business,

for personal use is called Drawings.

 Profit as per Accounting Equation = Closing

Capital – Opening Capital + Drawings – Fresh
Capital.

 The accounting cycle is always for one year.

 As per the accounting cycle, the transactions

cycle must be stopped on a particular day,
closing date. And the next day, the opening
day, the same set of repetitive activities
should restart.
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 Following is the process of accounting cycle

relating to Accounting Equation: Transactions
> place them on equation >stop the
transactions on closing > prepare Balance
Sheet > calculate profit (closing capital -
opening capital + drawings - fresh capital)

Accounting Equations / Episode No.13

❖Notes:

 When fresh capital is introduced, it means

liability, capital (internal liability)
gets increased in the firm.
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Accounting Equations / Episode No.14

❖Notes:

 Bad Debts means when receivables

become unrecoverable.

 Bad Debts is a loss for the firm.

Practical Question:
1. Bad Debts Rs.1,000/-.
Transa Capital + Liability Assets
ctions
Capital Creditors Cash Stock / Debtors
Goods
5,000 - 2,000 1,000 2,000
1. -1,000 - - -1,000
4,000 - 2,000 1,000 1,000

 Bad Debts always reduce the capital and

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debtors in Accounting Equation.

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 Insolvent means the person or firm, not

capable of paying debts.

 Purchases do not affect the capital in any

way. For cash purchases, it will reduce cash
and increase stock in equation. For credit
purchases, it will increase stock and
creditors.

 Credit Customers are called Debtors.

 When goods are purchased on credit, called

credit purchases, in Accounting Equation
it increases the stock and increases the
liability/creditors.

 Recovery from Debtors is not a gain, so does

not affect the Capital.
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 All cash receipts are not profits and all cash

payments are not expenses/ losses.

Example:
1. Furniture purchased on cash Rs.1,000/-.
2. Purchased goods from S, Rs.1,000/-.

Transactions Capital + Liability Assets

Capital Creditors Cash Stock / Furniture

Goods
+ 5,000 - +5,000 -
5,000 - 5,000 -
1. - - 1,000 - + 1,000
5,000 4,000 - 1,000
2. - +1,000 - +1,000 -
5,000 1,000 4,000 1,000 1,000
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Accounting Equations / Episode No.15

❖Notes:

 Bad debts recovered means the money

recovered from the debtor which was
previously treated as Bad Debts.

 Bad Debts Recovered is an income.

 Bad Debts Recovered increases the Capital

and Cash in the Accounting Equation.

Practical Question:
 Bad debts recovered Rs.600/-.
 Received 500 from debtor.
Transactions Capital + Liability Assets
Capital Creditors Cash Debtors
1 + 5,000 - +4,000 +1,000
5,000 - 4,000 1,000
2. +600 - +600 -
5,600 - 4,600 1,000
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 Any money to be recovered in future is

our Asset. Example: if any firm has paid rent
in advance, that prepaid rent is an asset until
it is used/exhausted.

Example: Rent paid in advance Rs.300/-

Transact Capital + Liability Assets

ions
Capital Creditors Cash Prepaid
rent
+ 5,000 - +5,000
5,000 - 5,000
1. - - 300 + 300
5,000 4,700 300

 Recovery/money received from the

debtor is not an income. But recovery
from Bad Debts is an income.
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Accounting Equations / Episode No.16

❖Notes:

 Drawings mean any asset taken by the owner

from the firm for personal use.

 Drawings may be in the form

of cash/ goods /any other asset.

 Drawings reduce the capital and the

concerned asset in the Accounting Equation.

 Capital always gets reduced in the accounting

equation by two reasons:
 Drawings

 Loss and expenses.

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 Capital always gets increased in the

accounting equation by two reasons:
 Fresh capital

 Incomes or gains or profit in the

transaction.

Practical Question:
 Cash taken for private use Rs.300/-.
 Goods taken for private use Rs.100/-.

Transact Capital + Liability Assets

ions

Capital Creditors Cash Stock / Goods

1 + 5,000 - +5,000 500

5,000 - 5,000 500
2. -300 - -300 -
4,700 - 4,700 500
3. -100 - - -100
4,600 - 4,700 400
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Accounting Equations / Episode No.17

===
❖Notes:

 Depreciation means a decrease in the value of

Fixed Asset.

 Fixed Asset means very long term Asset.

 Furniture, Machinery, Building etc., are the

best examples of Fixed Assets.

 Reduction in the value of Fixed Asset may be

due to wear and tear, the introduction of new
design and technology etc.

 Depreciation is a loss/expense for the Firm.

 Depreciation reduces the profit/capital in the

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 Depreciation reduces the capital as well as

the value of an asset in the Accounting
Equation.

 Depreciation on every Fixed Asset must

be calculated every year on the day of
closing to reach the true annual profit.

Practical Question:
 Purchased furniture for Rs.2,000/-.
 Depreciation on Furniture Rs.500/-

Transacti Capital + Liability Assets

ons
Capital Creditors Cash Furniture

1 + 5,000 - +5,000 -
5,000 - 5,000
2. - - -2,000 +2,000
5,000 - 3,000 2,000
3. -500 - - -500
4,500 - 3,000 1,500
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 Business owner has to do many spending to run

the business like paying for rent, salary,
purchases, furniture and computer etc. The
routine spendings on expenses or buying short
term items (less then one year) are called
revenue expenditure like:
I. Buying paper for computer.
II. Buying stationary.
III. Paying for rent, wages and salary etc.

 When spending is done for long term items

(more than one year), is called capital
expenditure:
I. Buying furniture
II. Buying computer
III. Buying vehicle etc.

 As the above items will be used in business for

long term (more than one year).
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 In trading and manufacturing firms, we have to

deal in goods. Goods are always at risk of loss
whether at godown or transit. These losses of
goods are of two types:

1. Normal loss
2. Abnormal loss

 Normal loss of goods is that loss which is due to

nature of goods like normal spillages of oil,
normal shrinkage of coal and normal breakage
of glassware etc. It is not avoidable and part of
normal business routine.

 Abnormal loss is that loss which is due to

human error, carelessness, calamity,
mismanagement, theft, fire or accident etc.

 There is no accounting treatment of normal

loss. As this loss reduces the value of closing
stock, and that reduces the profit at the end.
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 Example: Goods lost by fire ₹500/-.

Transactions Capital + Liability Assets

Capital Creditors Cash Stock /

Goods
+ 5,000 - +4,000 +1,000
5,000 - 4,000 1,000
1. -500 - - -500
4,500 - 4,000 500

 In the accounting cycle of accounting equation,

abnormal loss of goods reduces the stock and
reduces the capital.
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Practical Question:

1. A starts business with cash Rs.5,000/-.

2. Purchased goods Rs.1,000/-.
3. A Sold goods to C, costing Rs.500 /- for
Rs.2,000/-.
4. Paid Wages Rs.300/-
5. Paid Salary Rs.1,000/-.
6. Paid carriage inwards Rs.1,000/-.
7. Bad Debts Rs.1,000/-.
8. Bad Debts Recovered Rs.600/-.
9. Cash taken for private use Rs.300/-.
10. Goods taken for private use Rs.100/-.
11. Purchased furniture for Rs.2,000/-.
12. Depreciation on Furniture Rs.500/-
13. Purchased goods from S, Rs.1,000/-.
14. Sold goods costing Rs.1,000 for Rs.3,000.
Closing stock as on 31.03.2020 Rs.400/-.
Prepare Balance Sheet as on 31.03.2020 and
calculate the profit earned by the firm during the
year 31.03.2020 on the basis of accounting
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equation.
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Transacti Capital + Liability Assets

ons
Capital Creditors Cash Stock / Debtors Furniture
Goods
1 + 5,000 - +5,000 - - -
5,000 - 5,000 - - -
2 - -1,000 +1,000 - -
5,000 - 4,000 1,000 -
3 +1,500 - - -500 +2,000 -
6,500 - 4,000 500 2,000 -
4 -300 - -300 - - -
6,200 - 3,700 500 2,000 -
5 -1,000 - -1,000 - - -
5,200 - 2,700 500 2,000 -
6 -1,000 - -1,000 - -
4,200 - 1,700 500 2,000 -
7 -1,000 - - -1,000 -
3,200 - 1,700 500 1,000 -
8 +600 - +600 - -
3,800 - 2,300 500 1,000 -
9 -300 - -300 - - -
3,500 - 2,000 500 1,000 -
10 -100 - - -100 - -
3,400 - 2,000 400 1,000 -
11 - - -2,000 - - +2,000
3,400 - - 400 1000 2,000
12 -500 - - - - -500
2,900 - - 400 1,000 1500
13 - +1,000 - +1,000 - -
2,900 1,000 - 1,400 1,000 1,500
14 +2,000 - +3,000 -1,000 - -
4,900 1,000 3,000 400 1,000 1,500

Balance Sheet as at 31.03.2020

Capital + Liability Amount Assets Amount
Capital 4,900 Cash 3,000
Creditors 1,000 Stock 4,00
Debtors 1,000
Furniture 1,500
5,900 5,900
Profit =Closing Capital – Opening Capital + Drawings – Fresh Capital
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= 4,900 - 5,000 + 400– 0

Profit = 300/-
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1. Last equation is converted into Balance Sheet

(See above)
2. Last equation gives us profit by the following
formula:
Closing capital - opening capital + drawings - fresh
capital
(See above)
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TOPIC: JOURNAL ENTRY

Though now a days, accounting is done on available computer
applications and software. Here we are trying to teach you the
manual accounting. It is a proven track that no body can become
skilled accountant unless he knows the very basics of this subject.
Manual accounting is the best way to learn basics. Though this
chapter of the course has been prepared for beginners of
accounting at school or university level but this learning will be
equally useful for those people who aspire to become skilled
accounting professional and aspiring IT professionals who are
planning to develop some accounting related computer application
or software in future. It can also help a lot to give the overall view
of accounting for entrepreneurs.

There are three accounting cycles for maintaining books of any firm
or company.
Accounting Equations
Journal entries
Subsidiary books.

Under this chapter, the accounting cycle of Journal Entries has

been explained which can help you to do the full accounting of
transactions of any firm. Though it is neither acceptable in the
industry nor the IT ambit or tax authorities. But this accounting
cycle will help you a lot to understand the insights of accounting.
We can not ignore this fact that this accounting cycle is explained in
schools and universities to make the foundation of this subject.
Journal Entries / Episode No.01
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❖Notes:

 The ultimate purpose of Accounting is to find

the profit and financial position of the business.

 Financial position means the position of Assets &

Liabilities of the firm.

 Steps in the accounting cycle: Transactions →

Journal Entries → Ledger Posting → Trial Balance
→ Final Accounts.

 By using the above accounting cycle we can

maintain the proper books of any firm. In other
words, accounting of any firm can be done using
the above accounting cycle/process.

 As per this cycle, every transaction is converted

into Journal Entry.

 Accountancy is based on ‘Double Entry System’.

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 Every business transactions have got two/double

aspects: Debit & Credit.

 Every business transactions have got two/double

aspects: Debit account & Credit account. That’s
why it is called double entry system.

Final A/Cs contains two

statements:
Income Statement:
Balance Sheet:
The income statement tell
Balance Sheet tells about
about the profit
the financial position of the
earned/loss suffered by
firm.
the firm.

 Final accounts and financial statements

are one and the same thing.
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 Under Separate Entity Concept firm and owner are

different persons.

 Owner is the real person and firm is an artificial

person.

 Accounting is done from the point of view of the

firm as per ‘Separate Entity Concept.’

 Investment of the owner in the firm means capital

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+ long term loans. Both are shown on the

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liability side in the Balance Sheet of the firm. This

term is different from investments of business,
will be explained later.

 Example: A saves Rs.5,000 and takes 10,000 as

long term loan from bank. With this amount of
Rs.5,000 he starts his new business of making
health drinks. Here 5,000 is his capital and 15,000
as his investment in the business.

 Capital is an internal liability of the firm. This

amount is payable by firm to owner at the time of
discontinuous of business.

 Rules for making Journal Entries. Order not to be

disturbed.

 For making journal entry, the transaction is placed

on this order. Then the two parts/aspects of the
transaction are found out which are debit (Dr.)
and credit (Cr.)
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 Debit all expenses and losses, credit all incomes

and gains, (Nominal Accounts).

 Debit what comes in, Credit what goes out, (Real

Accounts).

 Debit the receiver, credit the giver, (Personal

Accounts).
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 In journal entry, minimum two items (accounts)

get involved.

 Debit is written as Dr. and credit is written as Cr.

In journal entries.

 Following is the format or look of the journal

entry.
Example: 1. A starts business with cash Rs.5,000/-.

Debit Credit
All Expenses & Losses All Incomes & Gains

What comes in What goes out

Cash
The Receiver The Giver
ACapital
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Debit Credit

Cash A a/c
Capital a/c

Journal Entry:
Cash a/c Dr.
To Capital a/c

Journal Entry in the books of A

Date Particulars L/F Debit Credit

1. Cash a/c Dr. 5000

To Capital a/c 5000
(Being Cash introduced by A
as Capital)

 Owner’s name is never debited or credited in the

Journal Entry, instead Capital A/c or Drawings a/c
is used.
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Journal Entries / Episode No.02

❖Notes:

 Expenses mean routine or regular spendings by

the firm to run the business.
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 Wages, Salary and advertisement etc. are

examples of expenses. These business
spendings/expenses help the firm/business to
earn profit.

 Goods mean the items purchased on a regular

basis in the business to sell at a higher price to
make profit.

 Goods are written as Purchases or Sales in

Journal Entries.

 Goods purchased is not taken as an expense.

 Example:1. A Purchased goods for Rs.1,000/-.

Debit Credit
All Expenses & Losses All Incomes & Gains

What comes in What goes out

Goods Cash
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The Receiver The Giver

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Debit Credit

Goods Cash
Purchases

Journal Entry:
Purchases a/c Dr.
To Cash a/c

2. A Sold goods costing Rs.1,000/- for Rs.2,000/-

.
Debit Credit
All Expenses & Losses All Incomes & Gains

What comes in What goes out

Cash Goods / Sales
The Receiver The Giver
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Debit Credit

Cash Goods
Sales

Journal Entry:
Cash a/c Dr.
To Sales a/c

Journal in the books of A

Date Particulars L/F Debit Credit

1. Purchases a/cDr. 1,000

To Cash a/c 1,000
(Being goods purchased)
2. Cash a/c Dr. 2,000
To Sales a/c 2,000
(Being Cash Sales)
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 In journal entry, goods account is never used. It

should be written as either purchases or sales
account (a/c).

 In journal entry, the amounts of debit and

credit are always equal. That’s why it is called
double entry system.

 If goods have been sold on profit, this profit is

never shown in the Journal Entry. It is always
shown at selling price. However this profit
made used to be shown in accounting equation.

 If goods have been sold on loss, this loss is never

shown in the Journal Entry. It is always shown at
selling price. However this loss made used to be
shown in accounting equation.

 At the time of Journal Entry of ‘sales’, only the

selling price is considered not the cost price of
goods.
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 Cash discount means to accept less money than

previously agreed amount.

 Cash discount is not possible if there were no

credit sales or purchases.

 Cash discount is the reward for early payment.

 Cash discount is the best tool to collect cash at

the earliest.

 Cash discount is an expense for seller/

supplier/creditor.
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 Cash discount is a gain/income for

customer/debtor.

 Discount allowed is an expense. Expenses are

always debited in journal entries.

 Seller / creditor/ supplier allow the discount for

early recovery.

 Cash discount is allowed or provided by credit

supplier or creditor.

 Discount allowed or discount provided are one

and same thing.

 Discount is earned or received by credit

customer or debtor.

 Discount earned or discount received are one

and same thing.

 Discount received is an income. Gain or income

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is always credited in journal entry.

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 Customer/debtor receives or earns the discount

for early payment.

 Example. A (supplier / seller) sells goods on

credit to B (customer) for 10,000 on
01/01/2020. B, the customer, promises to pay
this money after two months on 01/03/2020.
On 01/02/2020, B agrees to clear his dues, one
month before due date, at payment of 9800
and A agrees to accept this less money. This is
the case of cash discount. A) This discount of
200 (10,000-9,800) is the reward of early
payment. B) This is called cash discount. C)Cash
discount means discount for early cash
payment. D) Cash discount is the best tool for
collect cash at the earliest. E) cash discount is
an expense for A (seller/ supplier/ creditor) F)
cash discount is a gain/income for (customer /
debtor)Journal entry for A (seller / supplier /
creditor):
 This discount of 200 (10,000-9,800) is the
reward of early payment.
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 This is called cash discount.

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 Cash discount means discount for early cash

payment.
 Cash discount is the best tool for collect cash at
the earliest.
 Cash discount is an expense for A (seller/
supplier/ creditor).
 Cash discount is a gain/income for (customer /
debtor) Journal entry for A (seller / supplier /
creditor):

Debit Credit
All Expenses & Losses All Incomes & Gains
Discount - 200
What comes in What goes out
Cash – 9,800
The Receiver The Giver
Customer

Debit Credit

Discount a/c B’ a/c

Cash a/c
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Journal Entry:
Cash a/c Dr.
Discount a/c Dr.
To B’s a/c

Journal Entry in the books of A

Date Particulars L/F Debit Credit
1. Cash a/c Dr. 9,800
Discount a/c Dr. 200
To B’s a/c 10,000
(Being goods sold on
discount basis)

 Journal entry for B (customer / debtor):

Debit Credit
All Expenses & Losses All Incomes & Gains
Discount - 200
What comes in What goes out
Cash – 9,800
The Receiver The Giver
A
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Debit Credit

A’s a/c Discount a/c

Cash a/c
Journal Entry:
A’s a/c Dr.
To Cash a/c
To Discount a/c
Date Particulars L/F Debit Credit
1. A’s a/c Dr. 10,000
To Cash a/c 9,800
To Discount a/c 200
(Being goods sold on
discount basis)

 Gains are always credited. It is called discount

RECEIVED.

 Expenses are always debited. It is called

discount ALLOWED.

 Trade discount is the amount which is given for

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bulk or big sales.

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Example: A sells one television for 10,000. He offers

to his customer B that if he buys two televisions, he
can sell for 19000 instead of 20,000. This less
money of 1000 will be treated as Trade discount. In
this situation sales or Purchases will be considered
at 19,000 for both parties in the journal entries.

Journal entry in the books of A

Date Particulars L/F Debit Credit
1. B’s a/c Dr. 19,000
To Sales 19,000
(Being goods sold on
trade discount)

 There is no accounting treatment for trade

discount.

 Trade discount is neither debited nor credited

anywhere.

 Trade discount is simply adjusted in the amount

of sales or purchases.
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Journal Entries / Episode No.03

❖Notes:

 At the end of the year, physical stock-taking

(physical stock counting) is done in every firm,
the cost price of those goods is called closing
stock.

 Closing stock is not mentioned in the Journal

Entry, simply write down the value at the
footnotes of Journal Entries.

 Closing stock is always written at the

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footnotes of Journal Entries.

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 Owner’s / Proprietor’s name is never used in

the Journal Entry, instead Capital / Drawings
a/c is used.

 Accounting Cycle means repetitive accounting

activities.

 Accounting Cycle is always for one year.

 Stock, Goods and Inventory are one and same

thing.
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 'Accounting Period Concept'

means accounting activities should stop after
every one year.

 'Accounting Period Concept' states that books

must be closed after every one year.

 L/F in accounting means Ledger Folio.

 Accounting period is always for one

year because one year covers all nature
seasons and business seasons, seasonal ups
and downs.
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Journal Entries / Episode No.04

❖Notes:

 If it is not mentioned whether purchases are

cash or credit, we assume that these
are cash purchases, if the name of the party is
not given.

 The word Goods a/c is not mentioned in

Journal Entries, instead, the
word purchases or sales a/c is used.
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 Bad debts mean the money that could not

be recovered from the customer.

 Bad debts recovered means money received

from credit customer which was earlier
treated as bad debt.

 Bad debts recovered is an income.

 Bad debts recovered account is always

credited.

 Example:
1. Rs.500 was due from B. He got insolvent
and nothing could be recovered.

Debit Credit
All Expenses & Losses All Incomes & Gains
Bad Debts
What comes in What goes out

The Receiver The Giver

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Debit Credit

Bad Debts B’ a/c

Journal Entry:
Bad Debts a/c Dr.
To B’s a/c

Date Particulars L/F Debit Credit

1. Bad Debts a/cDr. 500
To B’sa/c 500
(Being bad debts from B)
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Journal Entries / Episode No.05

❖Notes:

 Every organization needs different resources to

run the business like a machine, computer,
furniture and manpower etc.

 Manpower is the most important resource to

run the business.
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 Manpower can be of two types - Skilled &

Unskilled.

 Reward paid
to unskilled manpo
wer is called
generally wages.

 Reward paid to
skilled manpower is
called generally
salary.
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Example: A Traders pays Rs.1,000 to B as salary.

Debit Credit
All Expenses & Losses All Incomes & Gains
Salary
What comes in What goes out
Cash
The Receiver The Giver

Debit Credit

Salary Cash

Journal Entry:
Salary a/c Dr.
To Cash a/c

Date Particulars L/F Debit Credit

1. Salary a/c Dr. 1,000
To Cash a/c 1,000
(Being salary paid)
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 When journal entry for payment of expenses is

passed, the name of the receiving person or
recipient is never mentioned.

 Money Measurement Concept states that only

those incidents, events or deals are recorded in
accountancy which can be measured
in money terms.

 Example
The most efficient manager leaves the firm
of Raj Traders. This incident is quite
important and unfortunate for the firm but
it can not be treated as transaction in
accounting because this event has no
money value.
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 Purchases can be of two types – Cash Purchases

& Credit Purchases.

 If the question is silent about the type of

Sales/Purchases and the name of the party is
given, it is assumed that these
are credit Purchases/ Sales.

 Example:
A sells goods to B for Rs.2,000/-.
It will be treated as credit sales because the
statement is silent but name of the party is
given.
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 Example:
A sells goods for Rs.2,000
It will be treated as cash sales because the
statement is silent and name of the party is not
given.

 Sales are always shown at selling price in

Journal Entry NOT at cost price.

 Profit on sale of goods is never shown in the

Journal Entry.

 Example: A sells goods costing Rs.500 for

Rs.2,000

Date Particulars L/F Debit Credit

1. Cash a/c Dr. 2,000
To Sales a/c 2,000
(Being goods sold on cash basis)
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Journal Entries / Episode No.06

❖Notes:

 Transaction means any incident, event, dealing

or give and take, which has money value and
related to our business.
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 Credit transaction means money does not move

immediately.

 Credit Sales means goods are sold to the

customer but the customer does not pay cash
immediately.

 Credit Customer is called a debtor. Means

money to be received in future / later.
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 Debtors are shown as an asset in the Balance

Sheet. If any money to be received later is
treated as an asset.

 When due money becomes unrecoverable from

the debtor, is called Bad Debts.

 Credit Purchases means goods are purchased

from the supplier but cash is not paid
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 Credit supplier is called a creditor. As it

becomes owing for the firm.

 If the word is the only carriage, means Carriage

Inward.

 ‘Goods purchased’ is not an expense or loss.

 ‘Goods sold’ is not any income or gain.

 ‘Goods sold are always shown at the

selling price in the Journal Entry, the cost price
is not concerned in any way.
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Journal Entries / Episode No. 07

❖Notes:

 Carriage means the cost of carrying goods.

 Carriage Outward means the cost of carrying

goods to customers.

 Carriage Outward and carriage on sales are

one and the same thing
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 Example: Paid carriage Rs1,000/-.

Debit Credit
All Expenses & Losses All Incomes & Gains
Carriage
What comes in What goes out
Cash
The Receiver The Giver
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Debit Credit

Carriage Cash

Journal Entry:
Carriage a/c Dr.
To Cash a/c

Date Particulars L/F Debit Credit

1. Carriage a/c Dr. 1,000
To Cash a/c 1,000
(Being carriage paid)

 Payment to creditors in routine is not treated

as an expense for the firm.

 Example: Paid cash Rs.1,000/- to C, our

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Debit Credit
All Expenses & Losses All Incomes & Gains

What comes in What goes out

Cash
The Receiver The Giver
C

Debit Credit

C’s a/c Cash

Journal Entry:
C’s a/c Dr.
To Cash a/c

Date Particulars L/F Debit Credit

1. C’s a/c Dr. 1,000
To Cash a/c 1,000
(Being cash paid to creditor)
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 Accounting Made Easy

 Sales are of two types: 1) Cash sales. 2). Credit

sales.

 For Journal Entry of sales, only the selling

price is considered NOT cost price.

 For making Journal Entry of sales, profit on

that is not considered at all.

 While making a Journal Entry, a/c (account)

should be used as a suffix after every item
mentioned. For example, Furniture a/c.
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 Accounting Made Easy

Journal Entries / Episode No. 08

❖Notes:

 Bad debts mean the money that could not

be recovered from the customer.

 Closing stock is always written at

the footnotes of Journal Entries.

 Bad debts recovered means money received

from credit customer which was earlier
treated as bad debt.

 Example: Goods were sold to B on credit for

600, which was previously turned bad. Now
recovered.
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Debit Credit
All Expenses & Losses All Incomes & Gains
Bad Debts Recovered
What comes in What goes out
Cash
The Receiver The Giver

Debit Credit

Cash Bad Debts

Recovereda/c

Journal Entry:
Cash a/c Dr.
To Bad Debts Recovered a/c

Date Particulars L/F Debit Credit

1. Cash a/c Dr. 600
To Bad Debts Recovereda/c 600
(Being bad debts recovered)
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 Accounting Made Easy

Journal Entries / Episode No.09

❖Notes:

 Cash received from debtors are not treated

as income.

 Example: Cash 1000 received from B, our

debtor.
Debit Credit
All Expenses & Losses All Incomes & Gains

What comes in What goes out

Cash
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The Receiver The Giver

Page

B
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 Accounting Made Easy

Debit Credit

Cash B’ a/c

Journal Entry:
Cash a/c Dr.
To B’ a/c
Date Particulars L/F Debit Credit
1. Cash a/c Dr. 1,000
To B’sa/c 1,000
(Being cash received from B)

 While making Journal Entry of bad debts

recovered, the name of the debtor is not
mentioned.

 Bad debts recovered is treated as income.

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 Accounting Made Easy

Journal Entries / Episode No.10

❖Notes:

 Depreciation means a decrease in the value of

long term / fixed asset due to wear and tear,
change of fashion and technology.
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 Accounting Made Easy

 There is no depreciation on intangible assets.

 Intangible asset means that does not have any

physical shape and cannot be seen or touched.

 Any decrease in the value of the fixed asset due

to any fire or accident cannot be called
depreciation.
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 Accounting Made Easy

 Example:
Five years ago, one computer was bought for
business for 50,000. Now its market value is only
10,000. It means we have lost 40,000 in value of
computer over last four years. It is called
depreciation.
1. Total depreciation - 40,000
2. Period - 4 years
3. Annual depreciation - 40,000/4 = 10,000

 Depreciation is an expense, so must

be debited in Journal Entry.

 Depreciation is always calculated on annual

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 Accounting Made Easy

 Depreciation is always calculated on the day of

closing.

 The following points are considered while

calculating annual / yearly depreciation:
Purchases price of asset
Estimated life of asset
Resale value of asset at the end of
usage.

 Example
A computer is purchased today on 01/04/2020.
It’s estimated life is 4 years. At the end it can be
sold as junk for 10,000. Books are closed on 31st
March every year.
Features of this example:
1. Total depreciation (loss in value of asset) -
50,000-10,000=40,000
2. Period of usage - 4 years
3. Total depreciation - 40,000
4. Annual depreciation - 40,000/4=10,000
5. It means on every 31st March, journal entry
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 Accounting Made Easy

 How to pass annual journal entry.

Debit Credit
All Expenses & Losses All Incomes & Gains
Depreciation

What comes in What goes out

Computer

The Receiver The Giver

Debit Credit

Depreciation/c Computer a/c

Journal Entry:
Depreciation a/c Dr.
To Computer a/c

Date Particulars L/F Debit Credit

1. Depreciationa/c Dr. 10,000
To Computer a/c 10,000
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(Being depreciation on computer)

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 Accounting Made Easy

 Sometimes one more rule is applied, that is -

asset must be credited if it is losing value.

 Financial position means the position of assets

and liabilities of the firm.

 Final accounts or financial statements are one

and the same thing.
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 Accounting Made Easy

 Final accounts contain two statements 1)

Income Statement 2) Balance Sheet

 Position statement and Balance Sheets are one

and the same thing.

 The income statement tells us about the profit

earned during the year.

 Balance Sheet tells us about the financial

position of the firm at a particular time.

 Making Journal Entry of any business

transaction means finding out
the debit and credit aspect of the transaction.

 While making Journal Entry ‘To’ is used as a

prefix to credit aspect.
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 Accounting Made Easy

Journal Entries / Episode No.11

❖Notes:

 Drawings mean any asset taken by the

owner or proprietor for personal use.

 Drawings can be in three forms: 1) Cash 2)

Goods 3) Any other asset.
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 Accounting Made Easy

 Drawings are not an expense for the firm.

 If drawings are in goods, it must be valued

at cost price not selling price.

 While making a Journal Entry, the owner’s

name is never used,
instead, capital account
or drawings account is used in Journal
Entries.
 Whenever goods are out but not as
sales, purchases account is credited.

 Goods a/c is never used in Journal Entries,

instead of sales a/c or Purchases a/c is
used.

 Drawings in goods are always calculated

at a cost not selling price.

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 Accounting Made Easy

 Example:
i. Cash taken for private use Rs.300/-

Debit Credit
All Expenses & Losses All Incomes & Gains

What comes in What goes out

Cash a/c
The Receiver The Giver
Drawings

Debit Credit

Drawings a/c Cash a/c

Journal Entry:
Drawings a/c Dr.
To Cash a/c

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 Accounting Made Easy

ii. Goods taken for private use Rs.100/-.

Debit Credit
All Expenses & Losses All Incomes & Gains

What comes in What goes out

Goods Purchases
The Receiver The Giver
Drawings

Debit Credit

Drawings a/c Goods

Purchases a/c

Journal Entry:
Drawings a/c Dr.
To Purchases a/c

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 Accounting Made Easy

Date Particulars L/F Debit Credit

1. Drawingsa/c Dr. 300
To Cash a/c 300
(Being cash taken for private use
2. Drawings a/c Dr. 100
To Purchases a/c 100
(Goods taken for private use)

 Why purchases? We can not use sales account.

We can not use goods account as well. So
purchases account will be credited. It will be
further explained later at advance level.

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 Accounting Made Easy

Journal Entries / Episode No.12

❖Notes:

 The situation when goods are out but not as

sales: 1) goods taken by the owner for personal
use as drawings. 2) Goods are distributed as a
charity, gifts or ad advertisement etc. 3) goods
lost by fire, theft or accident etc.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 Whenever goods are out but not for

sales, goods are always valued at cost price not
selling price, and purchases a/c is credited.
Example:
Journal Proper
Date Particulars L.F. Debit Credit
01.04. Advertisement a/c Dr. xxx
2019 To Purchases a/c xxx
(Being A introduced cash as
capital)

 If books are being prepared by Journal Entries

accounting cycle, and some different opening
balances are given, you are strongly advised to
prepare opening Balance Sheet and pass
opening Journal Entry.

 Example
Balances as on 31st March were as follows.
Capital 10,000, Debtor 2000, Creditor 3000,
cash 11,000.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 The solution will start with the following

opening Balance Sheet and opening journal
entry.

Opening Balance Sheet as on 01.04.2019

Capital + Liability Amount Assets Amount
Capital 10,000 Debtor 2,000

Creditor 3,000 Cash 11,000

13,000 13,000

Opening Journal Entry

In the books of ‘A’ Ltd
Date Particulars L.F. Debit Credit
01.04. Debtor a/c Dr. 2,000
2019 Cash a/c Dr. 11,000
To Capital a/c 10,000
3,000
To Creditor a/c
(Being opening balances of all
assets and liabilities)

 Whenever goods are out but not for sales,

goods are always valued at cost price not selling
price.
Ved Bangia/www.smartlectures.in
 Accounting Made Easy

Journal Entries / Episode No.13

❖Notes:

 If the opening balances are given, you are

strongly advised to prepare an opening
Balance Sheet before making further Journal
Entries.

 While making an opening Journal Entry, all

assets from opening Balance Sheet should
be debited, capital and liabilities from opening
Balance Sheet should be credited.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 If an asset is lost, it is treated as ‘credit what goes

out’ in a Journal Entry, so that asset should be
credited.

Example: Furniture worth 600 was lost in

fire.
Debit Credit
All Expenses & Losses All Incomes & Gains
Loss by fire
What comes in What goes out
Furniture
The Receiver The Giver

Debit Credit

Loss by fire a/c Furniture a/c

Journal Entry:
Loss by fire a/c Dr.
To Furniture a/c

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 Accounting Made Easy

Journal Proper
Date Particulars L.F. Debit Credit
01.04. Loss by fire/c Dr. 600
2019 To Furniture/c 600
(Being furniture lost in fire)

 At the time of sale of any asset (not

goods), sales account can never be credited.

 On the day of closing, the value of the stock is

called closing stock.

 Closing Stock is always shown at footnotes of

Journal Entries.

 The closing stock becomes the opening stock on

the next day for the firm.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 In trading and manufacturing firms, we have to

deal in goods. Goods are always at risk of loss
whether at godown or transit. These losses of
goods are of two types:
1. Normal loss
2. Abnormal loss
 Normal loss of goods is that loss which is due to
nature of goods like normal spillages of oil,
normal shrinkage of coal and normal breakage of
glassware etc. It is not avoidable and part of
normal business routine.

 Abnormal loss is that loss which is due to human

error, carelessness, calamity, mismanagement,
theft, fire or accident etc.

 There is no accounting treatment of normal loss.

As this loss reduces the value of closing stock, and
that reduces the profit at the end.

 If the accounting cycle of Journal Entries is

adopted, the following journal entry will be
passed.

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 Accounting Made Easy

 Example: Goods lost by fire ₹500

Debit Credit
All Expenses & Losses All Incomes & Gains
Loss by fire
What comes in What goes out
GoodsPurchases
The Receiver The Giver

Debit Credit

Loss by fire a/c Purchases a/c

Journal entry
Loss by fire a/c...Dr.
To Purchases a/c
Journal Proper
Date Particulars L.F. Debit Credit
01.04. Loss by fire/c Dr. 500
2019 To Purchases/c 500
(Being goods lost in fire)

 Whenever the goods are out but not as sales,

Purchases a/c is credited in Journal entry.
Ved Bangia/www.smartlectures.in
 Accounting Made Easy

Practical Question:
1. A starts business with cash Rs.5,000/- on
01.04.2019.
2. A Purchased goods Rs.1,000/-.
3. A Sold goods costing Rs.800/- for Rs.2,000/-.
4. Purchased furniture, Rs.2,000/-.
5. Depreciation on furniture, Rs.500/-.
6. Paid Wages Rs.300/-
7. Paid Salary Rs.300/-.
8. Cash taken for private use Rs.300/-.
9. Goods taken for private use Rs.100/-.
10. Bad Debts Rs.1,000/-.
11. Bad Debts Recovered Rs.600/-.
12. Paid carriage inwards Rs.1,000/-.
13. Cash lost by theft, Rs.500/-.
14. Goods lost by fire, Rs.200/-.
15. Furniture lost by fire, Rs.1,000/-.

Closing stock as on 31.03.2013 is Rs.200/-.

Prepare Balance Sheet as on 31.03.2013 and calculate
the profit earned by the firm during the year 31.03.2013
on the basis of accounting equation.

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 Accounting Made Easy

In the books of ‘A’ Ltd

Date Particulars L.F. Debit Credit
01.04. Cash a/c Dr. 5,000
2019 To Capital a/c 5,000
(Being A introduced cash as
capital)
2 Purchase a/c Dr. 1,000
To Cash a/c 1,000
(Being goods purchased)
3 Cash a/c Dr. 2,000
To Sales a/c 2,000
(Being goods sold on cash)
4 Furniture a/c Dr. 2,000
To Cash a/c 2,000
(Being furniture purchased on
cash)
5 Depreciation a/c Dr. 500
To Furniture a/c
(Being depreciation on furniture 500
a/c)
6 Wages a/cDr. 300
To Cash a/c 300
(Being wages paid)
7 Salary a/cDr. 300
To Cash a/c 300
(Being Salary paid)
8 Drawings a/cDr. 300
To Cash a/c 300
(Being cash taken for private
use)
9 Drawings a/c Dr. 100
To Purchases a/c 100

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 Accounting Made Easy
(Goods taken for private use)
10 Bad Debts a/c Dr. 1,000
To C 1,000
(Being debts from C)
11 Cash a/c Dr. 600
To Bad Debts Recovered a/c 600
(Being bad debts recovered)
12 Carriage Inward a/c Dr. 1000
To Cash a/c 1000
(Being carriage inward paid)
13 Loss by theft a/c Dr. 500
To Cash a/c 500
(Being cash lost by theft)
14 Loss by fire a/c Dr. 200
To Purchases a/c 200
(Being goods lost by fire)

Closing stock as on 31.03.2013 is Rs.200/-.

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 Accounting Made Easy

Topic:
Ledger Posting & Trial
Balance
Ledger Posting & Trial Balance / Episode No.01

❖ Notes:

 Accounting Cycle of Journal Entries:

Transactions → Journal Entries → Ledger
Posting → Trial Balance → Final Accounts.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 Making Journal Entry means finding out the

debit and credit aspects of the transaction.

 After completing Journal Entries, the list of all

accounts or items involved in Journal Entries is
prepared.

 In the list of accounts involved, no repetition of

any account is done. Doubling is not permitted.
As well as no account is missed.

 All these ledgers, accounts or items are shown

in ‘T’ shape.

 Left side is called debit side and right side is

called credit side.

Dr. Format of Ledger Account Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

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 Accounting Made Easy

 To debit in ledger means to write the amount

on the debit side, amount column, of the ledger.

 Example: When you are asked to debit a Salary

account by Rs.1,000 that means write Rs.1000
on the debit side of T shape Salary account.

Journal Entry:
Date Particulars L/F Debit Credit
1. Salary a/c Dr. 1,000
To Cash a/c 1,000
(Being salary paid)
1,000 1,000

Dr. Salary a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. To Cash a/c 1000

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 Accounting Made Easy

 If any amount is written on the debit side of the

ledger, it means that a/c has been posted on the
debit side.

 On debit/left side of the ledger, ‘To’ is used as a

prefix for every item.

Dr. Cash a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.

1. To Capital a/c

 To credit in ledger means to write the amount

on credit side of a out column in the ledger.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 Example: When you are asked to credit Cash

account by Rs.1000 that means write Rs.1000
on credit side of T shape cash account.

Journal Entry:
Date Particulars L/F Debit Credit
1. Salary a/c Dr. 1,000
To Cash a/c 1,000
(Being salary paid)
1,000 1,000

Dr. Cash a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. By Salary a/c 1000

 If any amount is written on the credit side of the

ledger, it means that a/c has been posted on the
credit side.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 On credit/right side of the ledger, ‘By’ is used as

a prefix for every item.

Date Particulars L.F. Debit Credit

01.04. Cash a/c Dr. 5,000
2019 To Capital a/c 5,000
(Being A introduced cash as
capital)

Dr. Capital a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. By Cash a/c 5,000

Dr. Cash a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. To Capital 5,000
a/c

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

Ledger Posting & Trial Balance /Episode No.02

❖ Notes:

 If any a/c has been debited in Journal Entry, the

same a/c will be debited in Ledger Posting.

 If some a/c has been debited in the ledger, it

means the amount has been written on debit
side of that same ledger.

Ledger Posting & Trial Balance /Episode No. 03

❖ Notes:

 ‘Balance c/d’ or ‘Closing balance’ is one and

the same thing.

 ‘Closing balance’ is the amount supplied to the

weaker side of ledger/account to make
the totals equal. That amount is also called
balancing figure.

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 Accounting Made Easy

Dr. Salary a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. To Cash a/c 1000 31.03. By balance

2020 c/d
or
By closing 1,000
balance

1,000 1,000
Balancing Figure

 At the time of ledger posting, Account and

Ledger are meant to be one and the same thing.

 Trial Balance is prepared on the basis

of closing balances of different
ledgers/accounts. Or we can say that Trial
Balance is the list of closing balances of
different ledgers / accounts.

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 Accounting Made Easy

Dr. Cash a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. To Capital 5,000 2. By Purchases 1,000

a/c a/c
3. To Sales a/c 2,000
31.03. By balance
2020 c/d
or
By closing 6,000
balance
7,000 7,000

Dr. Capital a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. By Cash a/c 5,000

31.03. To balance
2020 5,000
c/d
5,000 5,000

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 Accounting Made Easy

Dr. Purchases a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. To Cash a/c 1,000

31.03. By balance
2020 c/d 1,000
or
By closing
balance
1,000 1,000

Dr. Sales a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. By Cash a/c 2,000

31.03. To balance
2020 2,000
c/d
2,000 2,000

 Generally Trial Balance is prepared in ‘T’ shape.

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 Accounting Made Easy

TRIAL BALANCE AS ON 31.03.2020

Particulars Amount Particulars Amount
Cash 6,000 Capital 5,000
Purchases 1,000 Sales 2,000

Total 7,000 7,000

Closing stock as on 31.03.2019 is Rs.400/-.

 If any account/ledger has stronger debit side, it

is said that a/c carries debit balances.

 If any a/c or ledger has a stronger credit side, it

is said that a/c carries credit balance.

 All ledgers/accounts are closed on the day

of closing, at the end of accounting cycle.

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 Accounting Made Easy

 All closing balances are calculated on the day of

closing, at the end of accounting cycle.

 Accounting cycle must end on the day of

closing, after one year, as per ‘Accounting
period concept’

 All balancing figures of ledgers are calculated on

the day of closing, at the end of accounting
cycle.

Ledger Posting & Trial Balance /Episode No. 04

❖ Notes:

 The left side of ledger is called Debit/Dr. side

and the right side is called Credit/Cr. Side.

 If any a/c has been posted on the debit side, it

means amount has been written on the debit
side of the ledger in the amount column.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 If any a/c has been debited, it means amount

has been written on the debit side of the ledger
in the amount column.

 Example: When you are asked to debit a Wages

account by Rs.300 that means write Rs.300 on
the debit side of T shape Wages account.
Journal Entry:

Date Particulars L/F Debit Credit

1. Wages a/c Dr. 300
To Cash a/c 300
(Being wages paid)
300 300

Dr. Wages a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. To Cash a/c 300

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 Accounting Made Easy

 If any a/c has been credited, it means amount

has been written on credit side of the ledger in
the amount column.

 Example: When you are asked to credit Cash

account by Rs.300 that means write Rs.300 on
credit side of T shape cash account.
Journal Entry:
Date Particulars L/F Debit Credit
1. Wages a/c Dr. 300
To Cash a/c 300
(Being wages paid)
300 300

Dr. Cash a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. By Wages a/c 300

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

 The closing balance is the balancing figure, the

amount supplied to the weaker side of the
ledger to make the totals equal on both sides.

 Trial Balance is always prepared on the day of

closing, only at the end of financial year.

 All closing balances of ledgers are taken to Trial

Balance.

 Trial Balance is basically a house of closing

balances of all ledgers/accounts.

 If totals on both sides of Trial Balance are equal,

we assume that all accounting was done
correctly till now.

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 Accounting Made Easy

Ledger Posting and Trial Balance / Episode No.05

❖ Notes:

 Accounting Cycle: Transactions → Journal

Entries → Ledger Posting →Trial Balance →
Final Accounts.

 At the time of ledger posting, the amount

of debit column in Journal Entry goes to the
debit column of ledger.

 At the time of ledger posting, the amount

of credit column in Journal Entry goes to credit
column of ledger.

 Closing Stock is always written at

the footnotes of Trial Balance.

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 Accounting Made Easy

Ledger Posting & Trial Balance / Episode No.6

❖ Notes:

 ‘Carriage Inward’ is an expense, nominal

account, its closing balance is shown on debit
balances of Trial Balance.

TRIAL BALANCE AS ON 31.03.2020

Particulars Amount Particulars Amount

Carriage xxxx
Inward

Total xxxx xxxx

 Capital a/c, personal account, its closing

balance always appears on credit balances of
Trial Balance. Exceptions are there.
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 Accounting Made Easy

TRIAL BALANCE AS ON 31.03.2020

Particulars Amount Particulars Amount
Capital a/c xxxx

Total xxxx xxxx

 Drawings a/c, personal account, always appears

on debit balances of Trial Balance.

TRIAL BALANCE AS ON 31.03.2020

Particulars Amount Particulars Amount
Drawings xxxx
a/c

Total xxxx xxxx

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 Accounting Made Easy

Ledger Posting & Trial Balance / Episode No.07

❖ Notes:

 After completing ledger posting, a particular

amount (gap amount) is supplied to the
weaker side of the ledger so that
the totals on both sides become equal. It is
called the closing of ledger or account.

Ledger Posting & Trial Balance / Episode No.08

❖ Notes:

 Opening balance or Balance B/D is one and

the same thing.

 B/D means Brought Downward.

 Closing balance (c/d) of any ledger/account at

the end of accounting year, becomes opening
Balance (b/d) on the first day of next accounting
year.

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 Accounting Made Easy

Dr. Capital a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. By Cash a/c 5,000

31.03 To balance
5,000
.2020 c/d
(Closing
Balance)
5,000 5,000

Dr. Capital a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

01.04 By balance
.2020 b/d 5,000
(Opening
Balance)

 End of accounting year means when books are

closed and Trial Balance is prepared.

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 Accounting Made Easy

Ledger Posting & Trial Balance / Episode No.09

❖ Notes:

 To find out the closing balance of ledger means,

to supply the amount to the weaker side ofthe
ledger.

Practical Question:
16. A starts business with cash Rs.5,000/-
on 01.04.2019.
17. A Purchased goods Rs.1,000/-.
18. A Sold goods costing Rs.800/- for
Rs.2,000/-.
19. Purchased furniture, Rs.2,000/-.
20. Depreciation on furniture, Rs.500/-.
21. Paid carriage inwards Rs.1,000/-.
22. Goods lost by fire, Rs.200/-.
Closing stock as on 31.03.2020 is Rs.200/-.
Prepare Trial Balance as on 31.03.2020.

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 Accounting Made Easy

In the books of ‘A’ Ltd

Date Particulars L.F. Debit Credit
01.04. Cash a/c(1) Dr. 5,000
2019 To Capital a/c(1) 5,000
(Being A introduced cash as
capital)

2 Purchase a/c(2) Dr. 1,000

To Cash a/c(2) 1,000
(Being goods purchased)
3 Cash a/c(3) Dr. 2,000
To Sales a/c(3) 2,000
(Being goods sold on cash)
4 Furniture a/c(4) Dr. 2,000
To Cash a/c(4) 2,000
(Being furniture purchased on
cash)

5 Depreciation a/c(5) Dr. 500

To Furniture a/c(5)
(Being depreciation on furniture 500
a/c)

6 Carriage Inward a/c Dr.(6) 1000

To Cash a/c(6) 1000
(Being carriage inward paid)
7 Loss by fire a/c(7) Dr. 200
To Purchases a/c(7) 200
(Being goods lost by fire)

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 Accounting Made Easy

Dr. Cash a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. To Capital 5,000 2. By Purchases 1,000

a/c(1) a/c(2)
3. To Sales 2,000 4. By Furniture 2,000
a/c(3) a/c (4)
6. By Carriage 1,000
Inward a/c
(6)
31.03. By balance
2020 c/d
or
By closing 3,000
balance
7,000 7,000

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 Accounting Made Easy

Dr. Capital a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

1. By Cash a/c 5,000

(1)
31.03. To balance
2020 c/d
or 5,000
By closing
balance
5,000 5,000

Dr. Purchases a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

2. To Cash 1,000 7. By Loss by 200

a/c(2) fire a/c (7)
31.03. By balance
2020 c/d 800
or
By closing
balance
1,000 1,000

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 Accounting Made Easy

Dr. Sales a/c Cr

Date Particulars L.F. Amount Date Particulars L.F. Amount

3. By Cash a/c 2,000

(3)
31.03. To balance
2020 c/d
or 2,000
By closing
balance
2,000 2,000

Dr. Furniture a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.

4. To Cash a/c 2,000 5. By Depreciation 500

(4) a/c (5)
31.03. By balance c/d
2020 or 1,500
By closing balance
2,000 2,000

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 Accounting Made Easy

Dr. Depreciation a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.

5. To Furniture 500 31.03. By balance

a/c (5) 2020 c/d
or 500
By closing
balance
500 500

Dr. Carriage Inward a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.

6. To Cash a/c 1,000 31.03. By balance

(6) 2020 c/d
or
1,000
By closing
balance
1,000 1,000

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 Accounting Made Easy

Dr. Loss by Fire a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.

7. To Purchases 200 31.03. By balance
2020 200
a/c (7) c/d

200 200

TRIAL BALANCE AS ON 31.03.2020

Particulars Amount Particulars Amount
Cash 3,000 Capital 5,000
Purchases 800 Sales 2,000
Furniture 1,500
Depreciation
on Furniture 500
Carriage 1,000
Inward
Loss by Fire 200

7,000 7,000

Closing stock as on 31.03.2020 is Rs.200/-.

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 Accounting Made Easy

Topic:
Subsidiary Books
Though now a days, accounting is done on available computer
applications and softwares. Here we are trying to teach you the
manual accounting. It is a proven track that no body can become
skilled accountant unless he knows the very basics of this subject.
Manual accounting is the best way to learn basics. Though this
chapter of the course has been prepared for beginners of
accounting at school or university level but this learning will be
equally useful for those people who aspire to become skilled
accounting professional and aspiring IT professionals who are
planning to develop some accounting related computer application
or software in future. It can also help a lot to give the overall view
of accounting for entrepreneurs.

There are three accounting cycles for maintaining books of any firm
or company.
1. Accounting Equations
2. Journal entries
3. Subsidiary books.

Under this chapter, the accounting cycle of Subsidiary Books has

been explained which can help you to do the full accounting of
transactions of any firm. In fact all accounting computer
applications and softwares are prepared taking care of this cycle.

Ved Bangia/www.smartlectures.in
 Accounting Made Easy

Subsidiary Books / Episode No.01

❖Notes:

 The ultimate purpose of Accountancy is to know

about the profit earned during the year and
financial position at the end.

 Accounting cycle must end at the end of the

year as per ‘Accounting period concept’.

 In this chapter we will learn about the

accounting cycle of subsidiary books.

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 Accounting Made Easy

 Accounting Cycle –
Transactions → Recording in the Subsidiary
Books → Casting of the books → Ledger
Posting → Trial Balance → Final Accounts.

 Any book where the business transaction is

noted first time, is called Subsidiary Book.

 There are total eight subsidiary books.

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 Accounting Made Easy

 Cash transactions are recorded in the Cash

Book.

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 Accounting Made Easy

 Non-cash transactions are recorded in the

following seven other Subsidiary Books:
1. Purchases Book
2. Purchases Returns Book / Returns Outward Book
3. Sales Book
4. Sales Returns Book / Returns Inward Book
5. Bills Receivable (B/R) Books
6. Bills Payable (B/P) Book
7. Journal Proper

 Purchases Book is a Subsidiary Book which

records the credit purchase of goods.
Example:
1. Purchased goods from B for ₹2,000
2. Purchased goods from C for ₹3,000
Dr. Purchases Book Cr.

Date Name of supplier Inward L.F. Amount

Invoice No.
1. B 2,000
2. C 3,000
Total 5,000

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 Accounting Made Easy

 There are different formats of Purchases Book,

you can choose any one.

 Cash purchases are recorded in Cash Book and

credit purchases are recorded in Purchases
Book.

 Example:
1. A starts business with cash ₹5,000
2. Purchased goods for ₹1,000
3. Sold goods costing ₹500 for ₹1,000.
4. Purchased furniture for ₹1,000
5. Bad debts recovered from D ₹100
Dr. Receipts Cash Book Payments Cr.
Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To Capital 5,000 2. By Purchases 1,000
3. To Sales 1,000 4. By Furniture 1,000
5. To Bad debts 100
recovered
31st By Balance c/d
Mar.2020 4,100

Total 6,100 Total 6,100

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 Accounting Made Easy

 Purchases Returns Book is a book in which the

goods returned to suppliers are recorded.
Example:
Goods returned to B ₹100

Dr. Purchases Returns Book / Returns Outward Book

Date Name of supplier Debit Note L.F. Amount
No.
1. B 100

Total 100

Cr.

Dr. Purchases Returns a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To total of 100
purchases
returns
book
or
To Sundry
parties
100 100

Dr. B’s a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To 100
Purchases
Returns a/c
154

100 100
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 Accounting Made Easy

 A Sales Book is a record of all credit sales

made by business or firm.
Example: 1.Sold goods costing ₹600 to D for ₹2,000
.
2.Sold goods costing ₹700 to E for ₹3,000
Dr. Sales Book Cr.
Date Name of Customer Outward L.F. Amount
Invoice No.
1. D 2,000
2. E 3,000
Total 5,000

Dr. Sales a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. By total of 5,000
sales book

5,000 5,000

Dr. D’s a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. To Sales 2,000
book
2,000 2,000

Dr. E’s a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. To Sales 3,000
book
3,000 3,000
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 Accounting Made Easy

 In sales book, only selling price is mentioned

not the cost price.

 Sales Returns Book is that book in which we

record the goods returned by our customers
or buyers.
Example: Goods returned by D to us ₹200/-.

Sales Returns Book / Returns Inward Book

Date Name of Supplier Credit Note No. L.F. Amount

1. D 200

Total 200

Dr. Sales Returns a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To total of Sales 200
returns book
or
To Sundry parties
200 200

Dr. D’s a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. By Sales 200
Returns Book
200 200
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 Accounting Made Easy

 There are many modes of payment

1. Hard cash (notes and coins)
2. Cheque
3. Internet bank transfers
4. Bill of exchange (B/E)

 Bill of exchange is a written promise to pay

money in future.

 Bill of exchange is a legal document and helps

the lender/giver for quick and sure recovery
of money in the court.

 When bill of exchange is received, it is called

bill receivable. It is also called bill drawn.

 When bill of exchange is given, it is called bill

payable. It is also called bill accepted.

 Bills Receivable Book is a Subsidiary Book of

accounting, where all bills of exchange, which
are received from credit customers for the
business, are recorded.
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 Accounting Made Easy

Example:
1. Bill received from / drawn on D for ₹1,000/-.
2. Bill received from / drawn on E for ₹2,000/-.
Bills Receivable Book
Date Particulars L.F. Amount
1. D 1,000
2. E 2,000
Total 3,000

Dr. Bills Receivable a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To total of bills
receivable book
or 3,000
To Sundry parties
3,000 3,000

Dr. D’s a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. By bills 1,000
receivable
book
1,000 1,000

Dr. E’s a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
2. By bills 2,000
receivable
book
2,000 2,000
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 Accounting Made Easy

 Whenever the bill of exchange is received from

customer instead of cash, it is called bill drawn
on customer.

 Bills Payable Book is a subsidiary book of

accounting where all bills of exchange, which are
payable by the firm to the credit suppliers, are
recorded.
Example: 1. Bill delivered to / accepted from B for
₹1,000/-.
2. Bill delivered to / accepted from C for ₹2,000/-.
Dr. Bills Payable Book Cr.
Date Particulars L.F. Amount
1. B 1,000
2. C 2,000
Total 3,000
Dr. Bills Payable a/c Cr.
Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. By total of bills 3,000
payable book

3,000 3,000
Dr. B’s a/c Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount

1. Tobills payable 1,000

book

1,000 1,000

Dr. C’s a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. Tobills payable 2,000
159

book
2,000 2,000
Page

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 Accounting Made Easy

 Whenever bill of exchange is delivered to

credit supplier instead of cash, it is said that
bill has been accepted from party.

 All those transactions which can not be fitted

or recorded in any of other subsidiary books,
are recorded in journal proper.

 Journal entry is passed for the transaction

when it is recorded in Journal Proper.

 Journal proper is the book of Journal Entries.

 No cash transaction can be recorded in

Journal Proper.
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 Accounting Made Easy

Example:
 Bad debts from B ₹100/-.
 Depreciation on furniture ₹100/-.

Journal Proper
Date Particulars L.F. Debit Credit
1. Bad Debts a/c Dr. 100
To B a/c 100
(Being bad debts from
B)
2 Depreciation a/c Dr. 100
To Furniture a/c 100
(Being depreciation
provided on furniture)

 Journal proper and Journal Entry are NOT

one and same thing. Journal Proper is a
subsidiary book and Journal Entry is the
part of Journal Proper.
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 Accounting Made Easy

• In Subsidiary Books, for cash transactions

there is cash book. There are three types
of Cash Book.
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 Accounting Made Easy

I. One Column Cash Book

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
(Cash) (Cash)

Total xxx Total xxx

II. Two Column Cash Book

Date Particulars L.F. Amt. Amt. Date Particulars L.F. Amt. Amt.
(Cash) (Bank) (Cash) (Bank)

Total xxx xxx Total xxx xxx

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 Accounting Made Easy

III. Three Column Cash Book

Date Particulars L.F. Amt. Amt. Amt. Date Particulars L.F. Amt. Amt. Amt.
(Cash) (Bank) (Discount) (Cash) (Bank) (Discount)

Total xxx xxx xxx xxx xxx xxx

 In some schools and colleges, three

column cash book is no more made and
taught.
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 Accounting Made Easy

Subsidiary Books / Episode No.02

 ❖Notes:

Transactions types:
Cash Non-Cash
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 Cash Book (One column) and Cash a/c is

one and the same thing in this accounting
cycle.

 Accountancy is a process of different

stages.

 The term 'Accountancy' is used in a wider

term.

 The first stage of Accountancy is called

Accounting.

 Accounting is part of Accountancy.

 Recording of transactions in 'Cash Book

and Subsidiary Books' is called Accounting.
Though this term has been explained in
different ways by different authors. Even
some authors do not differentiate
between Book Keeping and Accounting.
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 Accounting Made Easy

 Cash a/c is a real a/c, carries a debit

balance.

 Debit side of Cash Book is always stronger,

so it always carries debit balance.

 Opening balance is always on the debit

side of Cash Book.

 The closing balance is always on the credit

side of Cash Book.

 Cash a/c is always on the assets side of the

Balance Sheet. Balance Sheet always
carries the closing balances of personal
and real accounts.

 Balance Sheet, liabilities side, always

carries personal accounts only.

 You will never find any nominal account in

Balance Sheet.
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 Accounting Made Easy

 Example:
Salary account is a nominal account but
outstanding salary account is a personal
account.

 In Subsidiary Books, Casting of books

means making totals.

 After recording transactions in Subsidiary

Books, a list of all accounts/items is made
and ledgers are opened for each item. No
item can be repeated or missed.

 Example:
1. A starts business with cash Rs.5,000/-.
2. A purchased goods for Rs.1,000/-.
3. A sold goods costing Rs.1,000/- for
Rs.2,000/-
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Dr. Receipts Cash Book Payments Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To Capital 5,000 2. By Purchases 1,000
st
2. To Sales 2,000 31 By Balance c/d 6,000
Mar.2020

Total 7,000 Total 7,000

Dr. Capital a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. By Cash a/c 5,000
31.03. To balance
2020 5,000
c/d
5,000 5,000
Dr. Purchases a/c Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
1. To Cash a/c 1,000
31.03 By balance 1,000
.2020 c/d

1,000 1,000

Dr. Sales a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. By Cash 2,000
a/c
31.03. To balance
2020 2,000
c/d
2,000 2,000
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 Accounting Made Easy

 Cash transactions go to Cash Book.

 Cash column in Cash Book has always

debit balance.

 Ledger posting is done on the basis of Cash

Book and other seven Subsidiary Books.

 All closing balances of the different ledger

are taken to Trial Balance.

Subsidiary Books / Episode No. 03

 ❖Notes:

 Type of Transaction:
I. Cash → Cash Book
II. Non-Cash → Other 7 Subsidiary
Books.
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 Trial Balance is the list of closing balances

of different ledgers.

 Closing stock is always at the footnotes of

Trial Balance.

 Purchases Book records: Credit purchases

of goods in trade.

 Total of Purchases Book is posted on the

debit side of Purchases a/c.
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 All parties mentioned in Purchases Book

are the creditors.

 Purchases Book and Purchase a/c are

different things. Purchases Book is a
Subsidiary Book but Purchases a/c is a
ledger, part of principal book.

 Purchases Returns Book and Purchases

Returns a/c are different things. Purchases
Returns Book is a Subsidiary Book but
Purchases Returns a/c is a ledger, part of
principal book.

 Sales Book and Sales a/c are different

things. Sales Book is a Subsidiary Book but
Sales a/c is a ledger, part of principal
book.
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 Sales Returns Book and Sales Returns a/c

are different things. Sales Returns Book is
a Subsidiary Book but Sales Returns a/c is
a ledger, part of principal book.

 Bills Receivable Book and Bills Receivable

a/c are different things. Bills Receivable
Book is a Subsidiary Book but Bills
Receivable a/c is a ledger, part of principal
book.

 Bills Payable Book and Bills Payable a/c

are different things. Bills Payable Book is a
Subsidiary Book but Bills Payable a/c is a
ledger, part of principal book.

Example:
1. Purchased goods from B for ₹2,000
2. Purchased goods from C for ₹3,000
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Purchases Book
Date Name of supplier Inward L.F. Amount
Invoice No.
1. B 2,000
2. C 3,000
Total 5,000

Dr. Purchases a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To total of 5,000
purchases book
or
To Sundry parties
5,000 5,000

Dr. B’sa/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. By 2,000
Purchases
book

Dr. C’sa/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
2. By 3,000
Purchases
book
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 The total of the purchase day book is

posted to the debit of purchases account.

Subsidiary Books / Episode No.04

❖Notes:

 Credit purchases are noted

down/recorded in Purchases Book.

 Returns to suppliers of credit purchases

are noted down/recorded in Purchases
Returns Book.

 Credit sales are noted down/recorded in

the Sales Book.

 Bill payable means bill of

exchange/promissory note delivered to
credit supplier.
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 Bill receivable means bill of

exchange/promissory note received
from credit customer.

 Bill of Exchange and promissory note are

one and the same thing in accounting.
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 Accounting Made Easy

 Bill of Exchange can be one of the

modes of payments.

 Journal Proper is the book of Journal

Entries.
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Subsidiary Books / Episode No.05

 ❖Notes:

 Capital a/c is a personal a/c, carries credit

balance, and is always taken to Trial
balance on credit balances.

Dr. Capital a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. By Cash a/c 5,000
31.03. To balance
2020 5,000
c/d
5,000 5,000

Trial Balance as on 31.03.2020

Particulars Amount Particulars Amount

Capital a/c 5,000

Total xxxx xxxx

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 Accounting Made Easy

 Sales a/c always carries credit balance, is a

nominal a/c.

Dr. Sales a/c Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.

1. By Cash 2,000
a/c
31.03 To balance 2,000
.2020 c/d
2,000 2,000

Credit Balance

 Purchases a/c always carries a debit

balance is a nominal a/c.

Dr. Purchases a/c Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount
1. To Cash a/c 1,000
31.03. By balance
2020 c/d 1,000

1,000 1,000

Debit Balance
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 Balance B/D, opening balance, means

balance brought downward.

 The book containing all the ledgers is

called Principal Book.

 The total of Subsidiary Books go to

respective accounts.
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Sr.No. Totals of Go to Side

I. Purchases Book Purchase a/c Debit
II. Purchases Returns Purchase Credit
Book Returns a/c
III. Sales Book Sales a/c Credit
IV. Sales Returns Book Sales Returns Debit
a/c
V. Bills Receivable (B/R) Bills Receivable Debit
Books a/c
VI. Bills Payable (B/P) Bills Payable Credit
Book (B/P) a/c
VII. Cash Book No Where -
VIII. Journal Proper No Where -

Names mentioned in Account is opened and

Subsidiary Book Amount is posted on
From Purchases Book Credit Side
From Purchases Returns Book Debit Side
From Sales Book Debit Side
From Sales Returns Book Credit Side
From Bills Receivable (B/R) Books Credit Side
From Bills Payable (B/P) Book Debit Side
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 Accounting cycle is→ Transactions >

Recording in the Subsidiary Books >
Principal Book > Trial Balance > Final
Accounts / Financial Statements.

Subsidiary Books / Episode No.06

❖Notes:

 Cash Book is a Subsidiary Books because

the transactions are first time noted down
/ becomes black and white in Cash Book.

 Cash Book is a Principal Book too as it is a

ledger.

 Cash Book is a Subsidiary Books as well as

Principal Book.
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 Accounting is always done from the point

of view of a firm, not an owner under a
Separate Entity Concept.

 Firm and owner are different persons.

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 In trading and manufacturing firms, we have

to deal in goods. Goods are always at risk of
loss whether at godown or transit. These
losses of goods are of two types:
1. Normal loss
2. Abnormal loss

 Normal loss of goods is that loss which is due

to nature of goods like normal spillages of oil,
normal shrinkage of coal and normal breakage
of glassware etc. It is not avoidable and part
of normal business routine.

 Abnormal loss is that loss which is due to

human error, carelessness, calamity,
mismanagement, theft, fire or accident etc.

 There is no accounting treatment of normal

loss. As this loss reduces the value of closing
stock, and that reduces the profit at the end.
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 In the accounting cycle of Subsidiary Books,

Journal Entry is passed for abnormal loss of
goods to be recorded in Journal Proper
(Subsidiary Book).

 Example: Goods lost by fire ₹500/-.

This transaction will be recorded in Journal

Proper.

Journal entry
Loss by fire a/c...Dr.
To Purchases a/c
Journal Proper
Date Particulars L.F. Debit Credit
01.04.2 Loss by firea/c Dr. 500
019 To Purchasesa/c 500
(Being goods lost in fire)

 Whenever the goods are out but not as

sales, Purchases a/c is credited.
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Practical question
Transactions in ‘A ’ for the year ending
31/03/2020
1. A starts business with cash ₹ 5,000
2. Purchased goods for ₹1,000
3. Purchased goods from B for ₹2,000
4. Purchased goods from C for ₹3,000
5. Goods returned to B ₹100
6. Sold goods costing ₹500 for ₹1,000.
7. Sold goods costing ₹600 to D for ₹2,000
8. Sold goods costing ₹700to E for ₹3,000
9. Goods returned by D to us ₹200
10. Purchased furniture for ₹1,000
11. Bill received from / drawn on D for ₹1,000
12. Bill received from / drawn on E for ₹2,000
13. Bill delivered to / accepted from B for ₹1,000
14. Bill delivered to / accepted from C for ₹2,000
15. Bad debts from D ₹200
16. Bad debts recovered from D ₹100
17. Depreciation on furniture ₹100
Closing stock as on 31/03/2020 was ₹4,000.
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Dr. Receipts Cash Book Payments Cr.

Date Particulars L.F. Amt. Date Particulars L.F. Amt.
1. To Capital 5,000 2. By Purchases 1,000
6. To Sales 1,000 10. By Furniture 1,000
16. To Bad debts 100
recovered

31st By Balance c/d

Mar.2020
4,100
Total 6,100 Total 6,100

Purchases Book

Date Name of supplier Inward L.F. Amount

Invoice
No.
3. B 2,000
4. C 3,000

Total 5,000
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Purchases Return Book

Date Name of supplier Debit Note L.F. Amount

No.
5 B 100

Total 100

Sales Book

Date Name of Customer Outward L.F. Amount

Invoice
No.
7. D 2,000
8. E 3,000

Total 5,000
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Sales Return Book

Date Name of Supplier Credit L.F. Amount

Note No.
9 D 200

Total 200

Bills Receivable Book

Date Particulars L.F. Amount

11 D 1,000
12 E 2,000
Total 3,000
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Bills Payable Book

Date Particulars L.F. Amount

13 B 1,000
14 C 2,000
Total 3,000

Journal Proper
Date Particulars L.F. Debit Credit
15. Bad Debts a/c Dr. 100
To B’s a/c 100
(Being bad debts from
B)
17. Depreciation a/c Dr. 100
To Furniture a/c 100
(Being depreciation on
furniture)

Closing stock as on 31/03/2020 is ₹4,000.

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Topic:
Final Accounts
Final Accounts / Episode No.01

❖Notes:

 Final accounts are always prepared on the

basis of Trial Balance.

 Final accounts are always prepared when the

totals of both sides of Trial Balance are equal.

 Trial Balance is called balanced when both

side totals are equal.

 'Trial Balance' is the statement of closing

balances of different accounts/ledgers.
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 There are three types of accounts in Trial

Balance:
Nominal Accounts
Real Accounts
Personal Accounts
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 The accounts of expenses, losses and gains

are called Nominal accounts. They also
include Purchases, Purchases Returns, Sales
and Sales Returns account.

 The examples of Nominal accounts:

Wages a/c
Carriage a/c
Bad Debts a/c
Loss by Theft a/c
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Depreciation a/c etc.

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 Real a/c include the accounts of assets. The

examples of Real accounts: Cash a/c,
Furniture a/c etc.

 Personal accounts include the accounts of any

person, firm, company or any organization's
a/c.

 Examples of Personal accounts:

Capital a/c
Drawings a/c
C's a/c etc.
Raheja Builders Pvt. Ltd account

 Purchases Returns/returns outward means

goods returned to the Supplier.

 Sales Returns/returns inward mean goods

returned by customers.
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Final Accounts / Episode No.02

❖Notes:

 'Final accounts' and 'Financial Statements' are

one and the same thing.

 'Final accounts' take us to the earning position

of the company through 'Income Statement'.

 'Final accounts' take us to the Financial

Position of the company through 'Balance
Sheet'.

 Final accounts are always prepared on the day

of closing of books.
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 Final Accounts consists of :

Income Statement
Balance Sheet

 Income Statement mainly consists of :

Trading a/c (for gross profit)
Profit & Loss a/c (for net profit)

 In 'Final accounts', we reach Net Profit via

Gross Profit.
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 Always use the suffix of 'for the year

ended……' after 'Trading a/c' and 'Profit & Loss
a/c'.

 Always use the suffix of 'as on….' After

'Balance Sheet'.

 Expenses are generally of two types:

Direct Expenses
Indirect Expenses

 Direct expenses are directly connected with

the production or directly relatable to the
activity.

 Indirect expenses are those expenses which

are not directly related or connected to the
production, they belong to office and
administrative, selling &distribution and
financial expenses.
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 Sometimes it becomes tricky for some

students to find the difference between direct
expenses and indirect expenses at the time of
making Final Accounts. To make it easy, just
imagine that it is a manufacturing unit and all
expenses till the goods are ready in factory
are direct expenses and thereafter all
expenses are Indirect.

 Direct expenses:
Manufacturing expenses
Factory rent
Carriage
Carriage inward
Fuel and power
Wages

 Indirect expenses are those expenses which

can not be directly related to any production
activity.
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 Examples of Office (indirect) Expenses:

Rent
Electricity
Salary

 Examples of Administrative expenses

(indirect):
Fuel and maintenance of cars
Manager's salary

 Examples of Selling expenses (indirect):

Cost of samples
Advertisement
Sales team's salary

 Examples of Distribution expenses (indirect):

Carriage outward
Godown rent
Godown expenses
Expenses of a delivery van.
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 Examples of Financial expenses (indirect):

Interest on short term and long term
loans.
Cash Discount

 Accounting can be done on three models

1. Cash model
2. Accrual / mercantile model
3. Hybrid model

Situation: Classic Book Store starts business on

01/04/2020 at rented property @ 1000 per
month. Books are closed on 31/03/2021. During
this year the proprietor was supposed to pay
12000 as rent for 12 months but he could pay only
10,000. The balance of 2,000 will be paid next
year.
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1. Cash model or cash basis

Only those expenses or incomes are considered
which have been actually paid and received
during this year. As per above situation, 10,000
has been paid as rent, so only 10,000 will be
considered as expense and will be taken to
Income Statement debit side. Same way incomes
are taken into account.

2. Accrual / mercantile basis.

Expenses and incomes are considered on due
basis, it does not matter how much has been paid.
As per above situation, rent of 12,000 will be
considered as expense and be taken to Income
Statement debit side because form was supposed
to pay 12,000. Same way incomes are taken into
account. This model is most appropriate as per
‘convention of conservatism’.

3. Hybrid model.
Under this model, expenses are taken on due
basis but incomes are taken on cash basis.
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Final Accounts / Episode No.03

❖Notes:

 Final Accounts consist of:

Trading a/c
Profit & Loss a/c
Balance Sheet

Final
Accounts

Profit & Balance

Trading a/c
Loss a/c Sheet
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 There must be a suffix of 'for the year

ended……' after Trading a/c. in the heading.

 All expenses are of two types:

Direct Expenses
Indirect Expenses

 Direct expenses are taken to Trading a/c,

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Debit side.
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 Trading a/c gives us 'Gross Profit' or 'Gross

Loss'.

 Gross Profit is taken to Profit & Loss a/c,

Credit side.

 Trial Balance must be balanced (equalize both

sides) before preparation of Final a/c.
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 Three golden rules of making Final accounts

from Trial Balance:

Do not miss the item

Do not repeat the item

Do not change the side

(Don’t change the side means:

Debit item of Trial Balance should go to
debit of a Final Accounts.
Credit item of Trial Balance should go to
credit of a Final Accounts.)
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 Rent, Commission and interest can be found

on any side of Trial Balance. If any of these is
on debit, it will be expense. If it is on credit, it
will be income.
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Final Accounts / Episode No.04

❖Notes:

 Closing stock is never included in the totals of

Trial Balance.

 Opening stock is always shown in Trial

Balance, debit balances side.

 Debit item of Trial Balance should go to the

debit side of Final accounts.

 Credit item of Trial Balance should go to the

credit side of Final accounts.

 All incomes go to 'Profit & Loss a/c', credit

side.

 Indirect expenses go to 'Profit & Loss a/c',

debit side.
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 There must be a suffix of 'as at……' after

Balance Sheet.

Final Accounts / Episode No.05

❖Notes:

 Assets side of the Balance Sheet is the list of

debit balances of various accounts/ledgers
from Trial Balance.

 Liabilities side of the Balance Sheet is the list

of credit balances of various accounts/ledgers
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from Trial Balance

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 There is no debit side or credit side of the

Balance Sheet because it is not a ledger.

 Closing stock is never the part of Trial Balance

totals.

 Closing stock is always shown at the footnote

of Trial Balance.

 If any item out of Trial Balance is taken to

Final accounts, it will hit twice on Final
accounts, one debit and one credit like closing
stock.

 Net Profit must be added to capital in the

inner column of the Balance Sheet.

 Closing stock hits Final accounts twice. It

appears on the credit side of the Trading
account and assets side (debit) of the Balance
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TRIAL BALANCE AS ON 31.03.2019

Particulars L.F. Debit Balance Credit Balance
Cash 6,000
Purchases a/c 1,000
Capital a/c 5,000
Sales a/c 2,000
Total 7,000 7,000
 Closing stock as on 31.03.2019 in 200
Dr. Trading Account for the year ended 31st March,2019 Cr.
Particulars Amount Particulars Amount
To Opening Stock ------ By Sales a/c 2,000
To Purchases a/c 1,000 By Closing Stock 200
To Direct Expenses ------
To Gross Profit 1,200
(Balancing Fig.)
2,200 2,200

Dr. Profit & Loss Account for the year ended 31st March,2019. Cr.
Particulars Amount Particulars Amount

To Indirect Expenses ----- By Gross Profit 1,200

To Net Profit 1,200

1,200 1,200

Balance Sheet as on 31st March,2019

Capital + Liability Amt. Assets Amt.

Capital 5,000 Cash 6,000

+ Net Profit 1,200 6,200 Closing Stock 200

6,200 6,200
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Final Accounts / Episode No.06

❖Notes:

 'Wages' is a direct expense, is taken to Trading

a/c, debit side.

 'Opening stock' and 'Closing stock' are always

shown at the corners of Trading a/c.

Dr. TRADING ACCOUNT Cr.

For the year ended 31st March,2019
Particulars Amount Particulars Amount
To Opening Stock xxx
To Wages a/c xxx

By Closing Stock xxx

Total xxx xxx

 Opening stock is always at the top debit of

Trading a/c.

 Closing stock is always at bottom credit of

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Trading a/c.
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Final Accounts / Episode No.07

❖Notes:

 Nominal accounts include purchases,

purchases returns, sales, sales returns,
expenses, losses, incomes and gains accounts.

 Real accounts include all the assets like cash,

furniture and stock etc.
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 Personal accounts include the accounts of any

person, firm, company or organization, like
capital a/c, drawings a/c, S's a/c, C's a/c, Rahul
John a/c, Mustafa a/c, etc.

 Direct expenses always go to the debit side of

Trading a/c.

 Indirect expenses always go debit side of Profit

& Loss a/c.

Final Accounts / Episode No.08

❖Notes:

 All assets are real accounts and can be

personal accounts, closing balances of these
real accounts always go to the assets side of
the Balance Sheet.
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 An account of any person, firm, company or

organization is called Personal a/c.

 Carriage inwards is an expense, is a Nominal

account.

 Carriage is a direct expense.

 Cash is an asset, a real a/c always carries a

debit balance.

 All real accounts go to Balance Sheet, debit

balances, assets side.

 Personal a/c always goes to Balance Sheet,

either assets side or Liabilities side.

 Nominal accounts always go to the Income

statement (Trading a/c, Profit & Loss a/c).
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Final Accounts / Episode No.09

❖Notes:

 Debit all expenses and losses, credit all

incomes and gains, (Nominal Accounts).
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 Debit what comes in, Credit what goes out,

(Real Accounts).

 Debit the receiver, credit the giver, (Personal

Accounts).

 All assets are in the category of Real a/c.

Final Accounts / Episode No.10

❖Notes:

 Capital a/c and Drawings a/c are personal

accounts.

 Capital a/c is an owner's a/c, a personal a/c.

 A trading account provides Gross Profit.

 Profit & Loss a/c provides Net Profit.

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Final Accounts / Episode No.11

❖Notes:

 Opening stock is always on the debit balances

of Trial Balance.

 Stock means the value of goods unsold

available in the firm.
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 Stock can be of three types:

Raw Material
Semi-Finished Stock / Work-In-Progress
Finished Stock

 In general business, units can be classified

into three categories:
Trading units
Manufacturing units
Services units
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 The trading unit is where purchased goods are

sold straightway to customers without making
any change in goods. Like a shop of books.

 The manufacturing unit is where purchased

goods are not sold straightway to customers.
They make a change in goods. Like the
restaurant.

 The service unit is where no goods are

involved. Only services of skilled people are
sold to customers. Like real estate agent,
investments consultancy.

 In the trading unit, there is no difference

among raw material, semi-finished or finished
goods because goods are sold as it is.
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Final Accounts / Episode No.12

❖Notes:

 Net Profit = Net Sales – Total Cost.

 Material Consumed = Opening Stock +

Purchases – Closing Stock.

 Total Cost = Material Consumed + All

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 Gross Profit = Sales – Cost of Goods Sold.

 Gross Profit = Net Profit + Indirect expenses

and losses – Incomes.

 There are two types of costs:

Cost of Goods Sold / Direct Cost
Total Cost

 There are two types of profits:

Gross Profit
Net Profit

Practical Question:
From the following Trial Balance of A’s Ltd you are
require to prepare Trading Account, Profit & Loss
Account for the year ending 31st March,2019 and
Balance Sheet as on that date.
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TRIAL BALANCE AS ON 31.03.2019

Particulars L.F. Debit Balance Credit Balance
Opening Stock 1,000 -
Purchases a/c 1,000 -
Capital a/c - 5,000
Sales a/c - 5,000
Wages 300 -
Salary 1,000 -
Bad Debts 200 -
Furniture 2,000 -
Debtors 2,000 -
Creditors - 2,500
Cash 5,000 -

Total 12,500 12,500

Closing stock as on 31.03.2019 in 200
Dr. Trading Account for the year ended 31st March,2019 Cr.
Particulars Amount Particulars Amount
To Opening Stock 1,000 By Sales a/c 5,000
To Purchases a/c 1,000 By Closing Stock 200
To Wages 300
To Gross Profit 2,900
(Balancing Fig.)
5,200 5,200
Dr. Profit & Loss Account for the year ended 31st March,2019. Cr.
Particulars Amount Particulars Amount
To Salary 1,000 By Gross Profit 2,900
To Bad debts 200
To Net Profit 1,700
2,900 2,900

Balance Sheet as on 31st March,2019

Capital + Liability Amt. Assets Amt.

Capital 5,000 Furniture 2,000

+ Net Profit 1,700 6,700 Debtors 2,000
Creditors 2,500 Cash 5,000
Closing Stock 200
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9,200 9,200
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